Cannabis In Canada – Sweeping Changes

Yesterday, Health Canada announced their proposed new legalization framework for cannabis in Canada – full proposal is found here – and which is now launching Canada to the forefront of the global cannabis market. I’ve seen many regulatory adjustments and changes to cannabis in the last decade, but nothing quite like this. Most of us are still waking up with a “regulatory hangover” and trying to process all of the changes. As the founder and CEO of the world’s largest and most professional cannabis compliance firm, I’m writing this article to provide my insights on where cannabis is headed. Because this is a game changer.

Many of us knew the changes were coming, but none of us predicted in full how far the government would take this. In short, Canada is creating a whole new framework for cannabis production and sales, which will immediately spill into these established industries: health products, food, cosmetics, pharmaceuticals, medical devices and agriculture.

Overnight, cannabis became an ingredient, not a product. Let me explain.

Cannabis Farming Outdoors

In the last four years, licensed producers of cannabis had to take on substantial investment (and patience) to become licensed to cultivate; they were also extremely limited in their ability to advertise and sell cannabis, being restricted to B2C sales through online sales. First mover advantage has been substantial in this space – and cultivators have had enormous valuations hardly understandable by any established industry standard. Today there are 74 licensed production facilities – and the patient base has been growing exponentially. A great time to be an LP.

But this all changes with these new proposed regulations. Cannabis, like tobacco or ginseng, is a plant and there is nothing proprietary about it. To date, LP’s haven’t been allowed to manufacture finished products (other than cannabis oil) that consumers can differentiate, other than unique strains or higher production standards (e.g., GMP, organic). In other words, the dried flower was the end product. The new changes will allow for outdoor farming, which will reduce the cost of production considerably – there will be unique challenges in growing outdoors, but, one can look at the wine industry in Canada as a great example of how an industry can adapt. Ontario wine is now a global leader (despite the grumblings in France).

I do feel that indoor grows will still have a strong play – perhaps more on the medical than the adult-use side – where quality standards will be important. Especially for exporting medical product to new markets (e.g., Germany).

However, outdoor farming of cannabis can – and will – be done, and farmers will develop the tools, genetics and methods to do this well. In this way, there will be no advantage importing from Colombia or Jamaica (also Health Canada stated yesterday in their proposal that they are not going to allow the importation of cannabis for resale). Domestic production of cannabis for the recreational market will eventually shift from indoor grows to outdoors grows. Even if the outdoor-grown dried flower is inferior for the first many years, it can be used as a starting material for extraction – purified and refined. In April 2017, our cultivation lead Jayson Goodale (formerly head grower for Tweed Farms) blogged about the “cropportunities” that would arise out of outdoor farming. I guess we’re now there, despite many thinking it wouldn’t happen.

Craft Growers

The second major change with these regulations is the ushering in of craft growers. I can’t stress enough how amazing this will be for the industry. Not only will such “micro-cultivators” not be required to have heavy security systems or a storage vault, but they will be able to operate on a small scale with less regulatory burden. Picture a 2,000 sqft greenhouse previously used to grow tomatoes, being retrofitted to grow cannabis with a smaller start-up budget. Growers will be able to hone in on their craft, focus on genetics and cultivation techniques, and truly become a craft producer that can compete with the large LP’s. With a smaller capital investment than getting into the craft beer space, this will attract thousands of entrepreneurs. I certainly hope Health Canada is hiring more review officers; they will be busy.

These micro growers will also be permitted to manufacture finished products (“processing”). The natural health products industry has over 10,000 brands on the Canadian markets, many of which producers are still small businesses with small production lines. We will surely see the same business model here, and likely many natural health product brands will develop cannabis products (low THC, sold in cannabis stores). This creates a tremendous business opportunity – ushering in sub-industries almost overnight. A small production facility manufacturing nhp’s, for example, could achieve a micro licence for processing and purchase their cannabis from a licensed cultivator – and treat it as an ingredient, just as they would ginseng or Vitamin E.

For the recreational market, then, if cannabis becomes that much cheaper to produce, and if there will end up being more and more cultivators and processors, the industry will begin shifting to the finished product market. There will always be a demand for dried flower – and for great product – but I predict over the next few years, there will be a tremendous shift towards finished product manufacturing.

The Shift to Finished Products

Cosmetics, natural health products, pharmaceuticals, veterinary health products and edibles. Note that edibles are coming in a year or so, but the other categories will have a licensing pathway laid out much sooner. After all, licensing nhp’s and vnhp’s already has an established regulatory framework – I was prominent in its development through NHP Consulting my other consulting firm. Cannabinoids will be just another medicinal ingredient that can be added to an nhp product – similar to resveratrol, rhodiola or glutamine. The framework is already there.

Licensed producers and LP applicants would be wise, in my opinion, to begin thinking immediately about achieving a Site Licence from the Natural and Non-prescription Health Products Directorate (NNHPD) preparing them for manufacturing cannabis health products. What’s great about the NHP Regulations is that a “natural health product” is practically any dosage form or route of administration (other than injection). This includes topicals, transdermal patches, chewing gum (e.g., Nicorette), shots, capsules, tablets, tinctures, suppositories, ear drops, eye drops, lozenges, etc. It could be a CBD cream you rub on your feet, or a cannabinoid chewing gum (not THC). Or an herbal medicine combination product containing medicinal herbs and an isolated cannabinoid. If you can’t see the opportunity yet, keep thinking. This truly is the birth of many industries overnight.

In order to license an nhp (to achieve what is called an NPN, Natural Product Number), we have to provide published research that the medicinal ingredients are safe and effective towards the claims on the label. An nhp has to have at least one substantiated health claim – but the evidence can be based on just one medicinal ingredient (not the finished product). The published evidence is usually from a peer-reviewed journal article in the literature, but it doesn’t have to be on a specific brand. Cannabis health products are likely only going to be allowed “lower level claims”, such as structure-function or low-risk therapeutic claims. But it will be a fantastic experience to uncover the best literature.

Cosmetics is going to be a tricky one. In theory, a cosmetic will now be permitted to contain most cannabis derived molecules, as long as they aren’t on the “hot list” of ingredients (which changes very rarely). Technically a cosmetic can’t have a lasting effect or health benefit – it’s just supposed to be superficial (e.g., makeup, temporary skin moisturizing, etc). Many cosmetic products, however, truly are cosmeceuticals – they are topical health products – but because there isn’t the published research to back their claims, they forego registering them as nhp’s. The “cosmetic-nhp interface” is the gray area between cosmetics and nhp’s, and adding cannabis into the mix adds a whole other level of regulatory confusion. But what I do know, is that the cosmetics industry is significantly larger than the nhp industry, and established cosmetic firms will be lining up to develop cannabis cosmetics sold in cannabis stores.

The same is true for medical devices and veterinary health products. NHP Consulting is the market leader in licensing products with Health Canada – over 66,000 submissions to Health Canada since 2004. We know the frameworks extremely well, and cannabis will fit into these frameworks nicely.

What’s interesting about the regulatory proposal is that the production and processing of cannabis (as an ingredient) will be dealt with under the Cannabis Act. But the manufacturing of cannabis nhp’s, cannabis cosmetics, cannabis pharmaceuticals, cannabis medical devices, and cannabis veterinary health products – will fall under the Food and Drugs Act. They’re proposing a dual licensing system.

For example, suppose an nhp manufacturer (who holds a Site Licence to manufacture) wants to make cannabis nhp products. They would continue to need the nhp Site Licence, but they would now need to acquire a cannabis facility licence (processing). So, two separate facility licences, from different Health Canada departments.

The same would be true for an LP who wants to manufacture cannabis health products – not only would they need their cannabis facility licence still, but they would have to achieve a Site Licence from the NNPHD. Two facility licences.

The same would hold true for pharma manufacturers (Drug Establishment Licence and also a cannabis processing licence) and medical device manufacturers (MDEL plus cannabis processing licence).

One note – no importation of cannabis products for resale will be allowed. All cannabis products will have to be manufactured (processed) in Canada. And only specialty cannabis stores (different provincial frameworks) will sell these – this means no health food stores or private online websites will sell. Health food stores will not be permitted to achieve a cannabis retail licence.

But the major added change for the LP industry here is product licensing. To date, LP’s have not had to license individual SKU’s – and they won’t have to if it continues to be just dried flower or cannabis oil (i.e, the raw material). Historically, a product licence (DIN, NPN, MDL, VNHP) is achieved for every SKU before they are launched onto the market (pre-market licensing system).

Of course, the proposal from yesterday isn’t yet passed into law. The new regulations (TBA) will still have to be introduced and passed, and also the Food and Drugs Act (and referencing Regulations such as the NHPR) will also have to be amended. But, I’m fairly confident they will pass in mostly the same form.

Getting ready for the new changes means applying for the right type of facility licence (SL, DEL, MDEL), preparing for the GMP standards for such facility licences, and looking ahead at equipment and personnel needed to start manufacturing finished products. If I was an LP, I would be looking at nhp acquisitions or revising a floor plan to include such a production area, to get ahead.

Novateur, CCI and NHP Consulting will be working closely together on helping our mutual clients set a critical path on developing products, applying for the right facility licence, drafting the appropriate GMP procedures and submitting product licence applications. NHP will focus on the product side, while CCI will focus on the facility side. Contact us today to learn how we can get to work – it’s going to be a busy year.

About the Author

Brian Wager is the CEO/Founder of both NHP Consulting Inc and Cannabis Compliance Inc, and has been an active advocate in the marketed health products space since 2004.